The numerous but often overlooked ranks of smaller RIAs face regulatory burdens that don’t affect their much larger brethren.
The 17,454 state-registered investment advisers at the end of 2020 had 27,412 total registrations with state securities agencies, the North American Securities Administrators Association’s RIA section
NASAA’s report offers a glimpse into the predominantly one- and two-employee practices and their ongoing compliance challenges, including
The state officials are “always open” to feedback from advisors and the industry, says Indiana Securities Commissioner Alex Glass, chair of the organization’s Investment Adviser Section.
“These really are small businesses, but they’re very important to the lives of a lot of Americans,” Glass says. “It's these smaller, state-registered ones that really get to the retail investors.”
More than 80% of state-registered RIAs have two or fewer employees and only 36% of the practices have registered representatives of a broker-dealer, according to NASAA. Although 84% collect the most common type of fees in the industry — expenses based on a percentage of assets under management — 52% use hourly fees and 51% charge a fixed or flat fee. Just 3% accept commissions and 1% use subscriptions, the NASAA report states.
Among SEC-registered RIAs, the share with commissions and subscriptions are the same, and the portion collecting AUM fees is higher at 95%. However, 30% charge hourly fees and 45% have fixed fees, lower figures than among state-registered firms.
Regulators’ scrutiny toward increasingly popular subscriptions, retainers and specific planning fees, as well as the headache of registering in a new state, are the two of the biggest compliance struggles facing state-registered RIAs, according to Scott Gill, founder of
Unlike SEC-registered firms that have at least $100 million in AUM or registrations in at least 15 different jurisdictions, the state-registered firms have the additional task. Furthermore, state examiners often question advisors’ use of alternative fees and a growing trend toward calculating subscriptions based on a client’s net worth or income, Gill says.
“We have not seen flexibility on behalf of state regulators in terms of their willingness to view financial planning as a separate and distinct service,” he says. “The problem is that the regulatory landscape — as it pertains to auditing firms — is based on the AUM model.”
For their part, regulators are concerned with finding documentation of the services provided to the client in exchange for, say, a monthly retainer, according to Glass. In 2021, the regulatory policy group of NASAA’s RIA section plans on “engaging investor advocacy and industry groups to discuss the evolving nature of investment adviser fee models,” along with “creating a guidance document related to investment adviser alternative fee models,” the report states.
“We've reached out to a lot of stakeholders,” Glass says. “We've had very healthy dialogue on both sides, so I think, ultimately, we’ll have a great product when it's finalized.”
